E18.25 CVP analysis and decisions: manufacturer

Lucid Images Ltd manufactures premium high definition televisions. The firm's fixed costs are $4 000 000 per year. The variable cost of each TV is $2000, and the TVs are sold for $3000 each. The company sold 5000 TVs during the previous year. (In the following requirements, ignore income taxes.)

Required:

Treat requirements 1 to 4 as independent situations:

1. Calculate the break-even point in units.

2. What will the new break-even point be if fixed costs increase by 10 per cent?

3. What was the company's net profit for the previous year?

4. The sales manager believes that a reduction in the sales price to $2500 will result in orders for 1200 more TVs each year. What will the break-even point be if the price is changed?

5. Should the price change discussed in requirement 4 be made? Explain.